IR THE: SIJPREMF; COIJR?' OF' THE STATE OF MODJTANA

AMERICAN FEDERAL SAVINGS AND LOAN ASSOCIATION, PI-aintiff and Appellant,-VSDENNIS SCHENK; PHYLLIS DIEHL; JOHN JEPSON; TOWNSEND ELECTRIC INC.

### , UNJ1'E;D STATES DEPARTMENT OF TREASURY, INTERNAII REVENUE; SERVICE; STATE OF MONTANA, DEPARTMENT OF LABOR AND INDUSTRY, UNEMPLOYMENT' INSURANCE DIVISION; and STATE OF MONTANA, DEPARTMENT OF REVENUE, Defendants and Respondents.

APPEAL FROM: DistrictCourtof the FirstJudicial District, In and for the County of Broadwater, The Honorable Henry Loble, Judge presiding. COUNSEL OF RECORD: For Appellant: Jock 0. Anderson argued; Gough, Shanahan, Johnson & Waterman, Helena, Montana For Respondent: John T. Flynn argued, Townsend, Montana R. BruceMcGinnis, Dept. of Revenue, Helena, Montana David Scott, Dept. of Labor & Industry, Helena, Montana KrisA. McLean, Asst. U.S. Atty., Helena, Montana CharlesA. Graveley, Helena, Montana

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### --- Submitted: January 11, 1990 Decided: January

--- -------Justice Diane G. Barz delivered the Opinion of the Court.

American Federal Savingsand LoanAssociation appeals from an order of the District Court for the First Judicial District, Broadwater County, granting summary judgment in favor of Townsend Electric, Inc. We reverse and remand. DennisSchenkborrowed $80,000fromappellant American Federal Savings and Loan to purchase the Commercial Bar in Townsend. Schenk executed a promissory note secured by a deed of trust recorded February 28, 1984, in favor of appellant. Subsequent to its completion of remodeling and electrical work on the Commercial Bar, respondent Townsend Electric perfected a mechanic's lien on April 26, 1985. None of theproceeds of appellantIs loanwereused

as payment for respondent's improvements. Appellant filed its complaint on November 27, 1987, seeking, among other things, foreclosure of the deed of trust. Respondent asserted as an affirmative defense the priority of its mechanic's lien. Both appellantand respondentmoved for summary judgmentand afterhearing onMay 19, 1989, the District Court entered judgment in favor of respondent on June 22, 1989. Appellant raises the following dispositive issue on appeal: Did the District Court erroneously concludethatrespondent'smechanic's lienhaspriority over appellant's prior recorded deed of trust? Appellant contends that mechanic's liens have priority over mortgages only when improvements are severable from real property citing as authority for its contention Interstate Lumber Co. v.Rider (1933), 93 Mont. 489, 19 P.2d 644 and 5 71-3-502(4), MCA (1985)

# . Rider borrowed funds with which to renovate a building located on realproperty owned by him. Interstate Lumber, 19 P.2d at 645. First and secondmortgages secured the loans. Interstate Lumber, 19 P.2d at 645. Interstate Lumber, from whom Rider obtained building supplies, attempted to foreclose on its materialman's lien when Rider failed to pay any part of his bill. InterstateLumber, 19 P.2d at 645. Although the materialman's lien statute was broadly interpreted and this Court found the remedy thereby provided equitable in nature, it held that the lien gave priority to the materialman only so far as the structurewas concerned and did not extend to the land. Interstate Lumber, 19 P.2d at 646-47. Furthermore, unless the improvements were severable without "material damage" to the existing structure, the prior recorded mortgage still prevailed over the materialman's lien. Interstate Lumber, 19 P.2d at 647. The recorded mortgage gives to thematerialman constructive notice of the existence of the lien, and he deals with the owner with knowledge that thehouse, aswell as the land, is pledged as security for the payment of the mortgage debt. Interstate Lumber, 19 P.2d at 647. The argumentspropounded by the parties in this case presume the nonseverability of respondent's improvements. Both appellant and respondent cite a trio of cases in support of their arguments. The first of the so called I1trilogy"is Beck

v. Hanson (1979), 180 Mont. 82, 589 P.2d 141. In Beck, thelandowner obtained a loan secured by two trust indentures, the proceeds of which were to be used to construct duplexes on a previously unimproved lot. Beck, 589 P.2d at 142. Neither the plaintiffs, who performed masonry work on the lot, nor the lender

nor any other materialmen were paid. Beck, 589 P.2d at 142. In the subsequent foreclosure action, the lender moved for summary judgment claiming the previously recorded trust indentures had priority while thematerialmen sought to enforce their mechanic's liens. Beck, 589 P.2d at 142. This Court affirmed the District Court's ruling that the mechanic's liens were ''a prior secured interest in the real property 

# . . . to the extent that material and laborwere furnishedby the [materialmen] for the construction of the improvements upon the property." I Beck 589 P.2d at 142. Appellant contends Beck does not alter the rule set forth in InterstateLumber: That amechanic's lienhas priority only to the extent of severable improvements. Respondent on the other hand, contends that Beck stands for theproposition that amechanic'slien takespriority over all the purchaser's rights at a trust indenture foreclosure sale thus giving the mechanic's lien priority over all encumbrances. Additionally, respondent argues amechanic's lien isprior inright not only as to the severable improvements, but also as to concurrently erected structures and the ownerst interest in the real property itself. Balancing the competing policies behind the Small Tract Financing Act and the mechanic's lien statutes, this Court foundthe beneficiary of the prior recorded trust indenture better equipped than the material supplier to protect its rights. Beck, 589 P.2d at 144. This Court upheld "the District Court's judgment that amechanic's lien for improvementsconstructed afterthegrant of a trust indenturehas priority over the interest of a purchaser at trustee's foreclosure sale." Beck, 589 P.2d at 144. The second case in the trilogy is Home Interiors, Inc. v. Henderson (1984), 214 Mont. 194, 692 P.2d 1229. Buyers in that case, who customarilyresoldhomes theyhad remodeledand improved, bought a homewith proceeds of a loan securedby a trust indenture. Home Interiors, 692P.2d at 1230. Subsequently,buyers engaged two materialmen to install carpet, linoleum and sub-flooring. Home Interiors, 692 P.2d at 1230. Buyers paid a minimal amount to one supplier,nothing to the other and defaulted on the loan one year later. Home Interiors, 692 P.2d at 1230. The District Court held themechanic's liens lacked priority over the trust indenture and were thus eliminated by the foreclosuresale. Home Interiors, 692 P.2d at 1231. Reversing the lower court ruling, this Court found

no reason to distinguish Home Interiors from Beck and: [Tlherefore [held] the party having the greatest ability to protect its interests has the burden of exercising due care to prevent overreachingby an interested party. In this case [lender] was in the best position to protect against non-payment by the landowner by either withholding funds to the extent of the contemplated improvements or by requiring the landowner to obtain lien waivers from the mechanics. [It found] no merit in [lender's] argument that section 71-3-502(4) should be construed strictlytopivot on thewords "upon the land." Such a narrow interpretationwould defeat thepurpose of the statute. [The Courtheld] appellants' liens [took] priority over respondentsttrust indenture. Home Interiors, 692 P.2d at 1232. Where the plaintiff-materialman filed suit to foreclose its mechanic's lien naming the lender as defendant by virtue of its mortgage on improved realproperty,theCourtupheldHome Interiors and rejected the rule that only mechanic's liens filed as to new structures have priority over other prior encumbrances. TriCounty Plumbing & Heating,Inc.v. LeveeRestorations,Inc. (1986)

### , 221 Mont. 403, 417-18, 720 P.2d 247, 256. Appellant advances the

same argument as did lender in Tri-County. Respondent contends Tri-Countv affords priority to mechanic's liens regardless of the nature of the work performed on the real property. We find the instant case readilydistinguishable fromthetrio of cases set forth above. Appellant and Schenk entered into the loan agreement almost a year prior to the commencement of improvements to the Commercial Bar. Appellant lacked any resource with which todetermine that Schenkwould commencea remodelingand improvement project at a date far removed from that on which it made the loan. Appellant could not withhold funds intended for construction as Schenk used the loan proceeds to purchase, not remodel, the Commercial Bar. Schenk was under no obligation 

### to notify appellant of the remodeling and related expenditures. Even had Schenkgiven notice, appellanthad no legal means available to further secure its lien position. In Beck, Home Interiors, and ~ri-countythe lenders knew or had reason to believe the borrowers would incur additionalobligations in improving the property encumbered when making the loans. In each case the Court found the party with the least abilitytoprotect its financial interest should have priority over other prior recorded liens. In the case at hand, respondent could easilyhavedeterminedthatappellanthad aprior recorded security interest. The result in the instant case is consistent with 5 71- 3-542,MCA, thecurrentpriority statute. We therefore reversethe order of the District Court granting respondent's motion for summary judgment and remand for entry of judgment in appellant's favor

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We concur:

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